JOBS Act: 5 things to look forward to (and 5 to dread)

As Obama signs the JOBS Act into law, crowdfunding becomes legal and companies get more flexibility in going public. Here's the good and the bad.

This bill is becoming law. Screenshot by Rafe Needleman/CNET

Today, President Obama passes the JOBS (Jumpstart Our Business Startups) Act, a collection of laws that relaxes regulations on capital raising for startup companies and gives all companies more flexibility in how and when they go public.

It's the "crowdfunding" provisions of the JOBS Act that are getting the most attention, and for good reason. The JOBS Act will allow startups, from taco trucks to mobile apps builders, to solicit the general public for investment -- an activity that was previously illegal. It will allow any individual to invest in these advertised startups as well. The hope is that the increased transparency into small businesses will lead to more businesses starting, increased employment, and that it will encourage business and technological innovation in the U.S.

There's a divide between Silicon Valley and Wall Street on JOBS. Silicon Valley (roughly speaking) favors dragging securities laws into the modern era. Wall Street likes its lock on the flow of investment dollars. Where do you fall? Here a five arguments you can use either way. Take your pick.

JOBS is good

  1. Mo' money for startups. The biggest benefit for new businesses: They can raise money from anyone. This is also a benefit for the general public. If you're a fan of a company and you're tempted to ask, "Can I invest in your company?" the answer now changes from No to Maybe.
  2. No more silly gag rules. JOBS levels the financial playing field in other ways. It gives startups more control over their message. The lifting of the "general solicitation" ban for investments means that startups can advertise themselves as fund-raising when they are still in very early stages, before they have a product. They can raise awareness, get excitement going, and use that to help get some money in the bank.
  3. The startup economy becomes transparent. More investors, large and small, will participate in the startup economy. Crowdfunding could encourage accredited investors to get more active with startups; currently fewer than 5% of them do, according to Ryan Caldbeck of CircleUp. Crowdfunded opportunities might be the training wheels that investors who are inexperienced with startups will use to become comfortable putting money into all startup vehicles. The JOBS Act might thus eventually increase the pool of available money for private businesses of all sizes. Crowdfunding will lead to other forms of openness. Chance Barnett, CEO of Crowdfunder, believes that there will be "significant emergent qualities from the process of collaboration that is crowdfunding."
  4. Startups can take longer to start. JOBS stops companies from being "forced" to go public if they take on 500 investors, and changes who counts as an investor. Previously, if 500 entities owned shares of a company, it had to file with the SEC. Now it's 2,000, and employees don't count. This will allow companies -- if they have the resources -- to stay private for longer while they build up the revenue stream that public markets reward. It gives well-funded companies flexibility as to how and when they enter the public markets, and could (theoretically) improve the quality of companies entering the public markets.
  5. Less onerous Sarbox paperwork. The JOBS Act also streamlines the process for going public for companies whose execs believe they are ready for it. Some businesses (such as those with under $1 billion in revenues) will now be able to go public without following all Sarbanes-Oxley compliance and disclosure regulations, at least for the first five years on the public markets. These regulations are expensive and onerous to follow, so this can help keep young companies lean. It also means that companies don't have to disclose sensitive information or trade secrets during the "on-ramp" to IPO period. This should help strong but smaller companies access the public market.

JOBS is bad

  1. A field day for scammers. Where there's money, there's fraud. Just as there will be emergent properties that help startups thanks to the JOBS Act, there will be unintended consequences. Several groups are forming up to come up with ways new crowdfunded businesses can self-regulate. This is critical, as even now the JOBS Act isn't fully baked regarding the best ways to prevent crowdfund investors from getting bilked. There's a 270-day regulation-writing period that starts today, during which this is all supposed to get sorted out. It won't be easy, and it may not be possible to foresee all the clever ways scammers will be able to rip people off.
  2. Grandma will lose her money . For a new class of private company investors, crowdfunding may be a rude awakening. Most businesses fail, and access to capital can't prevent that. People will continue to "lose money the old-fashioned way," as Naval Ravikant of AngelList says (KQED interview), on failed startups. While there are limits to the amounts that an individual can invest and thus lose, many consumers may still not be prepared to see their investments, no matter how small, wiped out. This could be an upside for lawyers, however.
  3. Startup CEOs could lose everything. Speaking of lawyers, companies that take crowdfunding expose their officers to personal liabiilty; they can be sued for their personal assets. For this reason, many businesses won't open up crowdfunding rounds unless they absolutely have to. The overall quality of crowdfunding investments will be lower than it would have been otherwise.
  4. Investors will still be in the dark. Directories and "portals" of crowdfunding opportunities will be severely limited as to the information they can display to users, since they'll be forbidden from making recommendations on investments. That means no rankings, no scoring, and no editorial advice. Companies will be able to put their information out to consumer investors, but it will be difficult for investors to rate the companies against each other. Companies like CrowdCheck and EquityNet ( story ) are building tools for investors that may help counteract this negative.
  5. More crappy IPOs. Potentially weaker companies could go public. The Sarbanes-Oxley regulations, enacted in 2002 after the Enron and other scandals, was designed to protect investors from exposure to poor public companies. Rolling back these restrictions for companies entering the public market could well leave the public exposed to weaker companies (NY Times DealBook).

It starts today
I've been talking to entrepreneurs, to angel investors, and to many (too many) people who are running or launching crowdfunding portals (everyone wants to have the Kickstarter of investing). In the technology economy, by and large, people support the JOBS Act.

However, few people in Silicon Valley expect that the crowdfunding provisions will make a big impact in how tech companies are started, funded, or advertised. They may well be wrong: Crowdfunding will change the nature of communication and openness around startups, even those who raise money the old way.

 

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